The curse of sequestration

1If you are like me, you’ve never heard the term sequestration as it relates to budgets until sometime last summer. Now it has become a part of our everyday fiscal vocabulary. But how real is sequestration? Why has it become such an issue? What’s the big deal about a five percent budget cut?

Here is a little background from Paul Johnson, Department of Political Science, Auburn University.

The term was adapted by Congress in more recent years to describe fiscal policy procedures originally provided for in the Gramm-Rudman-Hollings Deficit Reduction Act of 1985.

Under sequestration, an amount of money equal to the difference between the cap set in the Budget Resolution and the amount actually appropriated is "sequestered" by the Treasury and not handed over to the agencies to which it was originally appropriated by Congress. In theory, every agency has the same percentage of its appropriation withheld in order to take back the excessive spending on an "across the board" basis. However, Congress has chosen to exempt certain very large programs from the sequestration process (for example, Social Security and certain parts of the Defense budget), and the number of exempted programs has tended to increase over time Рwhich means that sequestration would have to take back gigantic shares of the budgets of the remaining programs in order to achieve the total cutbacks required, virtually crippling the activities of the unexempted programs.

The scope of five percent

I questioned why a budget cut as small as five percent was so difficult for government departments to achieve. Private sector businesses deal with much greater cuts every budget cycle. In fact, during my management days, I was always happy with anything less than 15 percent and considered it a financial victory! But now that I understand that Congress protects its favorite programs by making them exempt from sequestration, it becomes easier to understand how the reductions can be so harmful to the unprotected programs. To achieve an overall five percent reduction it often means that some of these unprotected programs take far greater budget hits.

It is frustrating to see how Congress can quickly make a program protected. Take, for example, the recent reductions in FAA controller headcount. Within hours of the staff reductions, Congress met to make this a protected program. All of a sudden money was found in other cracks to cover the reduction and the controllers were back at work. Why does it take acts of Congress to make it so? Why can't departments intelligently manage their own spending? Is this some kind of "Dumb and Dumber" plotline?

It would be great if a simple five percent reduction could be made across the board. Any manager who has ever had a budget has been able to survive such a mandate, most often coming out stronger in the end. Five percent is a rounding error to most of their budgets, and I'm sure there is plenty of leeway from which to pull it out.

The impact on development and design wins

Many of the suppliers of VITA technology have a heavy presence in the defense industry and a vested interest in the defense industry spending. What is especially frustrating for many of the suppliers is the uncertainty in how the reductions are being made. Many programs have protected status, but, as the political climate changes, the status of programs goes as well. Some of the defense programs have pushed out their timelines to protect themselves, impacting the supply chain through and through. This period of uncertainty is very difficult to navigate. Suppliers are being conservative in spending, which is hitting new product development the hardest right now.

New product development is paramount to securing design wins. New products open doors to potential new programs and customers. The design win often goes to the supplier with the latest innovations, not to the supplier with tired, re-spun products that have seen better days.

The VITA technology suppliers that are pushing ahead with innovation and new products seem to be holding up the best today. Take these challenging times to clean up and streamline your internal processes. Pare down the old product lines a bit. Challenge your marketing and design teams to meet with customers to learn all they possibly can about future needs. Most importantly, keep innovating. Your reward will show up in future design wins!